Revenue Recognition: New Disclosures

Revenue Recognition: New Disclosures

Step 1 Identify contract with customer

Step 2 Identify performance obligations

Step 3 Determine transaction

price

Step 4 Allocate transaction

price

Step 5 Recognize revenue

Disclosures

The deadline for adoption of the new revenue recognition guidance is fast approaching. For public entities1, implementation is required for the 2018 financial statements. All other entities will have an additional year. Certain industries will see greater changes to revenue recognition than others; however, all entities will be subject to extensive new disclosure requirements. In addition to affecting an entity's internal controls and business process around external financial reporting, the new standard will likely affect the core systems used to produce the numbers required in the quantitative disclosures. Feedback from companies with implementation efforts underway have indicated disclosures requirements have proven to be more challenging than initially estimated. Do not wait to review disclosure requirements. Companies should be assessing this information simultaneously with their implementation of the standard's recognition and measurement principles. Developing a disclosure requirement working plan upfront can avoid duplication of efforts and make data gathering more efficient. Questions entities should consider:

? What controls are in place to test the completeness and accuracy of the information disclosed?

? Is the current accounting information system capable of providing the required information?

? Is the current accounting system within the scope of internal control over financial reporting?

? How do current-year acquisitions or divestitures affect the revenue disclosures?

? What qualitative information would the financial statement user find interesting to supplement quantitative information?

? Have there been material changes in the timing of when performance obligations will result in revenue recognition?

? What payment terms, e.g., payments in arrears, milestones, contingent payments and postpaid customers, give rise to contract assets?

? How does the satisfaction of performance obligations correlate with customer payment?

? Are all significant judgments and estimates related to variable consideration, noncash consideration and determining the transaction price disclosed?

1 The new revenue standard defines a public entity as any one of these:

?

A public business entity

?

A not-for-profit entity that has issued, or is a conduit bond obligor for, securities traded, listed or quoted

on an exchange or over-the-counter market

?

An employee benefit plan that files or furnishes financial statements to the U.S. Securities and Exchange

Commission

Revenue Recognition: New Disclosures

? Has the entity adequately disclosed information about the methods, inputs and assumptions used in the annual financial statements?

? What judgments are made in selecting an appropriate measure of progress? ? What estimates help determine the level of completion? ? What information does management consider to determine when performance obligations are satisfied?

Even if the timing or amount of revenue recognized is not affected by the new revenue standard, disclosures will change.

Internal Controls

Entities should consider the need to design and implement new internal controls or modify existing controls to address risk areas resulting from the new processes, judgments and estimates. New risk areas may arise from changes to information technology systems and reports that provide data inputs used to support the new estimates and judgments. To the extent that data are needed to comply with the standard's requirements, entities will need to consider the internal controls that will be necessary to ensure the completeness and accuracy of this information, especially if the data were not previously captured.

Initial Adoption Timing

U.S. Securities and Exchange Commission (SEC) registrants are required to provide both annual and interim disclosures in the first interim period after the adoption of new accounting standards and in each subsequent quarter in the year of adoption, to the extent they are not duplicative.

New Disclosures

Objective

The objective of the disclosure requirements is to enable financial statement users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Current disclosure requirements are included in industry-specific and general recognition standards, but are limited and lack cohesion. The SEC also requires certain revenue disclosures for publicly traded companies. Current disclosure requirements include:

? General requirements ? accounting policies, seasonal revenue, segments, related parties ? Specific requirements ? multiple-element arrangements, nonmonetary revenue transactions, bill-and-

hold, fees for services ? Industry requirements ? construction contractors, franchisors The new disclosure requirements reflect the belief that disclosure should be more than just a compliance exercise. Qualitative information will be just as important as quantitative information for helping the reviewer better understand the nature of the organization's contract revenue. Companies should avoid standard "boilerplate" language.

Revenue from Contracts with Customers

An entity shall disclose all of the following amounts for the reporting period unless those amounts are separately presented in the financial statements:

2

Revenue Recognition: New Disclosures

? Revenue recognized from contracts with customers, which the entity shall separately disclose from its other sources of revenue

? Any impairment losses recognized (in accordance with Topic 310 on receivables) on any receivables or contract assets arising from an entity's contracts with customers, which the entity shall separately disclose from impairment losses from other contracts

An entity must determine which of its contracts or revenue streams are accounted for in accordance with Accounting Standards Codification (ASC) 606 rather than in accordance with guidance on other revenue transactions, e.g., financial instruments (interest income), leases (lease income) or insurance contracts. For example, an entity may be a lessor and derive revenue from its leasing operations in addition to various services it provides in contracts with customers. Some contracts with customers (or portions of them) are outside of ASC 606's scope. In those circumstances, unless the lessor's two sources of revenue are separately presented in the income statement, the lessor must disclose the breakdown of those two revenue sources:

Revenue from contracts with customers $

6,000

Interest income

2,000

Lease income

3,000

Revenue

$ 11,000

Disaggregation of Revenue from Contracts with Customers

The first set in planning for the new disclosure requirements is determining the correct level of detail for financial statement reporting. Revenue from contracts with customers must be disaggregated according to the nature, amount, timing and uncertainty of revenue and cash flows. This will require significant judgment. Information cannot be obscured by too much insignificant detail or aggregation of items with different characteristics. The disaggregated revenue must be reconciled to the revenues in the financial statements. The Financial Accounting Standards Board (FASB) did not prescribe a specific characteristic of revenue as the basis for disaggregation because it intended for entities to make this determination based on entity-specific and/or industry-specific factors that would be most meaningful for their businesses. An entity may need to use more than one type of category to disaggregate its revenue.

Segment disclosures may not be sufficiently disaggregated to achieve the disclosure objectives. Segment disclosures on revenue may not always provide users of financial statements with enough information to help them understand the composition of revenue recognized in the period.

Examples of categories that might be appropriate include, but are not limited to, all of these: ? Type of good or service, e.g., major product lines ? Geographical region, e.g., country or region ? Market or type of customer, e.g., governmental and nongovernmental customers ? Type of contract, e.g., fixed-price and time-and-materials contracts ? Contract duration, e.g., short-term and long-term contracts ? Timing of transfer of goods or services, e.g., revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred over time ? Sales channels, e.g., goods directly sold to consumers and goods sold through intermediaries

3

Revenue Recognition: New Disclosures

When selecting the type of category (or categories) to use to disaggregate revenue, an entity should consider how information about the entity's revenue has been presented for other purposes, including all of these:

? Disclosures presented outside the financial statements, e.g., in earnings releases, annual reports or investor presentations

? Information regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments

? Other information that is similar to the types of information identified in (a) and (b) and used by the entity or users of the entity's financial statements to evaluate the entity's financial performance or make resource allocation decisions

Public companies are required to provide a quantitative disclosure. ? Information about performance obligations, including when the entity typically satisfies performance obligations, e.g., upon shipment, upon delivery or as services are rendered ? Significant payment terms (when payment is due, variable consideration and significant financing components) ? Nature of goods and services ? Obligations for returns, refunds and similar obligations ? Types of warranties and related obligations

Nonpublic entities may elect to only disclose qualitative information about how economic factors affect the nature, timing and uncertainty of revenue and cash flows.

These disclosures do not need to be in a particular format; as a result, some entities may describe the interaction between the two required disclosures in the revenue footnote, while others may include the disclosures in the segment footnote. In addition, since the guidance is not prescriptive, the disclosures also may be presented in a tabular or narrative format.

The standard provided these examples:

Example: Disaggregation of Revenue--Quantitative Disclosure

An entity reports the following segments: consumer products, transportation and energy in accordance with Topic 280 on segment reporting. When the entity prepares its investor presentations, it disaggregates revenue into primary geographical markets, major product lines and timing of revenue recognition, i.e., goods transferred at a point in time or services transferred over time. The entity determines that the categories used in the investor presentations can be used to meet the objective of the disaggregation disclosure requirements, which is to disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The following table illustrates the disaggregation disclosure by primary geographical market, major product line and timing of revenue recognition, including a reconciliation of how the disaggregated revenue ties in with the consumer products, transportation and energy segments. Public companies would be required to disclose the following:

4

Revenue Recognition: New Disclosures

Contact Balances

The disclosure requirements have been developed to allow financial statement users to understand the relationship between the revenue recognized and changes in the overall balances of an entity's total contract assets and liabilities during a particular reporting period.

Disclosing contract assets and liabilities and the revenue recognized from changes in contract liabilities and performance obligations satisfied in previous periods will likely be a change in practice for most entities. Some industries may already provide "backlog" information or have information readily available to produce these disclosures. The backlog definition varies from industry to industry and may not be consistent with the new required disclosures. In addition, the requirement to disclose revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied in previous periods) may require additional information.

Required information includes: ? Opening and closing balances of receivables, contract assets and contract liabilities (if not presented elsewhere) ? Amount of revenue recognized that was included in the contract liability balance at the beginning of the period ? How the timing of satisfaction of its performance obligations relates to the typical timing of payment and the effect on the contract asset or liability. The explanation provided may use qualitative information ? Quantitative and qualitative description of significant changes, which could include changes due to business combinations, impairment, changes in estimates, timing or measure of progress

FASB has provided relief for nonpublic entities. Nonpublic entities may elect to only disclose the opening and closing balances of receivables, contract assets and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed. Entities are permitted to use different descriptions of contract assets, contract liabilities and receivables and could use additional line items to present those assets and liabilities if the entity also provides sufficient information for financial statement users to distinguish them.

5

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download